Government & Politics
 

BP bankruptcy is a real fear

After meeting with BP Chairman Carl-Henric Svanberg on June 16, President Obama said he was “absolutely confident BP will be able to meet its obligation to the Gulf Coast and to the American people. BP is a strong and viable company and it is in all of our interests that it remain so.”

The stock market doesn’t share the president’s absolute confidence. Since April 20, BP stock has declined and the company’s market capitalization has fallen over $100 billion. Naturally, speculations about BP’s future have intensified. And there’s no doubt that BP’s liabilities for the oil gusher will be massive. After compensating those who suffered lost income from the disaster and paying all cleanup and response costs, BP will still have civil lawsuits and potential criminal charges. The fines related to the Clean Water Act alone could cost them $4,300 per barrel spilled. At 48,000 barrels per day for 50 days before the oil was partially contained, that’s over $10 billion in fines right there.

Granted, BP has scores of billions in assets and strong cash flow (as long as oil stays over $60 a barrel) to deal with this disaster. But if BP is so rock solid, then why has its stock crumbled since the blowout? Perhaps more revealingly, why has Anadarko Petroleum’s stock value fallen in tandem? You’ll recall that Anadarko owns 25 percent of the Macondo well, along with BP (65 percent) and Mitsui & Co. (10 percent). Anadarko was a non-operating partner, and has emphasized that BP was reckless and should pay all the bills related to the mess. But if BP can and will pay, why are investors so skittish about Anadarko? Two reasons: total spill costs could escalate beyond BP’s ability to pay, and BP may use an option such as bankruptcy to shield itself from crippling liabilities. The government would then seek payment from Anadarko which, despite being a strong independent oil company, doesn’t have anywhere near the assets or cash to cover bills that BP is unable to pay.

While American public opinion on BP can hardly worsen, damage estimates from the oil gusher can only worsen –  perhaps exponentially. What if the “downhole integrity” of the Macondo well is compromised by oil/methane pressures before the relief wells are completed? What if storms push the oil slicks into the Gulf Stream currents, polluting the tourist beaches on the East Coast? What effects will the oil and dispersants have on the estuaries, fisheries and food chain? Clearly, as bad as it is now, the worst case scenario has yet to visit.

Sunday’s Times-Picayune had a front-page story about Alaskans affected by the Exxon Valdez oil spill, with the same findings as a Fox8 trip to the area. Many are still reeling from the disaster, and have waited decades to receive pennies on the dollar for their losses. The central lessons that they shared from the ordeal were: don’t expect things to ever be the same, widespread psychological effects are likely, and, perhaps most importantly, don’t trust the oil companies.

Following negotiations with the White House, BP agreed to put $20 billion dollars into an escrow fund to pay “legitimate” economic losses stemming from the Macondo oil gusher. Though some conservatives described this sequence of events as a “shakedown,” the $20 billion escrow account seems like a prudent step, given all the uncertainty surrounding BP. Surely the country can’t rely on BP to dutifully fall on its sword if their liabilities balloon. After all, BP’s first responsibility is to their shareholders, not to unemployed Gulf fisherman or oiled pelicans. The $20 billion dollar escrow fund seems like good insurance against the possibility of a BP bankruptcy, which would transfer most unpaid disaster costs back on the American taxpayer, since Anadarko couldn’t cover the tab.

Recently Bloomberg news asked the fund administrator about the possibility of a BP bankruptcy:

[Bankruptcy] would be a “horror,” a “disaster,” according to lawyer Kenneth Feinberg, who was appointed by President Barack Obama to administer BP Plc’s $20 billion compensation fund for victims of the Gulf oil spill. “That is not an option.”

Oh, don’t think it’s not an option! Bankruptcy, or insolvency proceedings, or stringing out lawsuits for decades, is certainly a consideration. It’s silly to believe that BP hasn’t analyzed these alternatives.

The latest Gambit Weekly (not online yet) has a cover story on political analyst James Carville’s feelings about the spill. In it, Carville noted that Obama’s June 15 speech wasn’t great, but at least he got the escrow money:

“I would rather have had that speech and $20 billion the next day than to have Lincoln’s Second Inaugural (Address) and $10 billion the next day,” [Carville] says.

But, did we really get $20 billion “the next day”? Most U.S. news reports describe the fund as if $20 billion is already in hand, but it isn’t.

“BP has agreed to contribute 20 billion dollars over a four-year period at a rate of five billion dollars per year, including five billion dollars within 2010,” a White House statement said.

Hmm. So the escrow account is really only a $5 billion fund for 2010, with additional $5 billion installments in each of the next 3 years. This assumes BP doesn’t renege, or its stock doesn’t tank, or its liabilities don’t grow exponentially, or oil prices don’t plummet, or their shareholders don’t revolt, or it doesn’t pursue bankruptcy or insolvency protections. Given the circumstances, $5 billion in escrow seems like paltry insurance against the possibility of BP bankruptcy. Perhaps the loss mitigation specialists at BP look approvingly at this arrangement, as the $5 billion payment buys BP six months of precious time. And what is with the 4-year payment plan, anyway? BP couldn’t afford $20 billion over 2 years? That’s disturbing. Won’t they need to, if they are going to pay all the claims in a reasonable amount of time? The terms of this escrow deal raise more questions than they answer.

Then the Bloomberg story throws one more packet of butterscotch into the festivities:

No one knows whether BP agreed in writing to the $20 billion escrow fund or to Feinberg’s power of attorney. Jon Pack, a London-based BP spokesman, couldn’t comment.

Is this whole deal based on a handshake and the naive faith that Big Oil will do the right thing, no matter how badly their fiscal house deteriorates? Will the American taxpayer ultimately foot a large portion of BP’s bill?

The Obama administration should heed the advice of the Alaskans who were never made whole after the Exxon Valdez spill: Don’t trust Big Oil.

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  • I do not see how we can trust BP’s Cost Estimates for this gusher. They are probably grossly overestimating to work it out in the Settlements/Fines/Penalties phase down the road.
    They say they are spending $100 MILLION/day. So what, they have now started telling the truth and give honest estimates?
    I don’t believe that this company will go bankrupt. This smells like a can of Valdez Herring redder than the Queen’s petticoat.

  • Part of it is that they are always combining oil “response” costs (including the very expensive relief wells) with the “relief” costs associated with paying out claims and damages, in order to promote a higher number. I’d like these costs categorized and itemized.

  • Nice tie in with Anadarko. Worth noting here is the old Wall Street saying, “where the generals lead the soldiers will follow.”

    BP’s ADRs set a new 52 week low today which means 7 more years of bad luck. With the new spill rate estimates and mitigation costs topping $2bn to date it is really anyone’s guess as to the final tally of fines and shutdown costs. And none of this counts the economic damages, which will be at least the $20bn that was escrowed. Last year BP generated $27bn of cash flows from operations, most of which went back to exploration.

    IMHO a BP bankruptcy is more likely than not.

    sop

  • GO

    This company made $16,000,000,000.00 in PROFITS last year. Companies can operate for years in the red. As mentioned almost in passing, this company has worldwide assets in the scores of billions of dollars.

    BP had $16,000,000,000.00(USD) in PROFITS on a total operating revenue of $246,000,000,000.00(USD) in 2009.

    They could cover the freaking fund with last year’s profits. Do you realize how silly your statement is? Will they be able to do it with this years? Of course not. But, to act like this company’s long-term health isn’t rosy as hell is ridiculous.

    Sop81_1, you should become a stock tout. Better yet, lemme guess…Do you run an NFL Betting Tout service as a day job? C’mon, seriously. Fess up. Your last name isn’t Cramer, is it?

  • GO you exhibit the dangers of posting at 3:21 AM dead drunk. Bashers say companies are going BK, Pumpers say they are going to the moon. Get yer story straight bub and crawl outta that bottle.

    Countrywide posted profits right up to the end. You can have yer profits dude, me, I’ll stick with the cash ’cause it don’t lie.

    sop

  • jeffrey

    Maybe if we got some large triple-A rated insurer to guarantee BP’s escrow payments……..

  • GO

    Define Irony: Someone alleging imbibing based on a 3:21 am CST posting time, while posting at 1:31 am CST. LOL!

    Having said that, the mortgage industry? Hmmm…Let’s see here…You’re comparing the oil & gas industry, a worldwide endeavor that’s feeding hungry mouths of huge developing economies like India & China, as well as established powers like Russia, the US, etc., & saying that because they posted profits right up until declaring BK, that this means BP will, as well?

    Seriously? Energy extraction, production, & provision, vs. the housing industry.

    Care to share for us-thanks to your deep & all encompassing knowledge of these subjects-about the results of a comparison & contrast of the worldwide energy industry vs. the US housing industry?

    Your opinion remains laughable, & your attempt at a personal aspersion or allusion goes over like a fart in church on Sunday from the front pew. All one has to do is bring you back to the point: You know not of what you speak.

    Period.

  • I hope that BP doesn’t go bankrupt. Not because I feel bad for them, but I don’t want them to have even the slightest chance of getting out of their obligations to the people whose lives they destroyed.

  • Hey, Sop…Not to keep bringing this point up, but guess who bought Countrywide? Guess whose profits are THREE BILLION this year?

    http://money.cnn.com/2010/07/16/news/companies/bank_of_america/?postversion=2010071615